Introduction To Accounting

Question 1

What is accounting concerned with and what is its aim?

Answer 1

Collecting, analysing and communicating decisions.

Its aim is help users make more informed decisions and to help prepare reports regularly.

Question 2

User groups

Answer 2

Customers
Lenders
Competitors
Employees
Community representatives
Investment analysts
Suppliers
Managers 
Owners

Question 3

Conflicting interests of users

Answer 3

The distribution of wealth - Managers may act in their own interest; accounting helps to monitor and report this.

Between lenders and owners: Funds loaned out may not be used for their agreed purpose (their loan agreement).

Employees: Fair share of wealth

Governments: Monopolies do not benefit from excessive profits

Question 4

How useful is accounting?

Answer 4

It is the best of the rest as there are no close substitutes.

For the information to be useful, the benefits must outweigh the costs. Information must be relevant (must cross a threshold of materiality) and be of faithful representation.

Other qualities:

Comparability, Verifiability, Timeliness and Understandability.

The cost of producing information will rise with every additional piece of information.

May be because, information becomes less relevant the more there is of it, may be difficult to process the sheer quantity of information, can be costly: Salaries of accounting staff, the cost of the user’s time spent analyzing and interpreting information.

Question 5

Sole Traders (proprietorships)

Answer 5

These are businesses where the individual is the sole owner.

Description:

• Small in size (revenue, staff etc.)
• Easy start-up (no legal; procedure)
• Mostly in the service sector
• The owner has the flexibility to restructure or dissolve the business whenever he wants.
• The law sees the owner as the business and the owner as one. Thus the owner will cease death of the business.
• Unlimited liability

Question 6

Partnerships

Answer 6

Where two or more individuals carry on a business together with the intention of making a profit.

Description:

• Small
• Easy start-up (no legal procedures)
• Restructured or dissolved by agreement between partners.
• Unlimited liability

Question 7

Limited companies

Answer 7

An Ltd. Company trades its shares privately.

A Plc trades its shares on the stock exchange.

• There is limited liability for the owners. However there is a cap on the liability which limits the risk, unlike partnerships.
• there is an obligation the way that they conduct there affairs e.g. a copy of the financial reports has to be given to the registrar of companies.

Question 8

Not-for-profit organisation

Answer 8

E.g. Charities, clubs and associations, universities, churches, trade unions.